The ABS market’s new Prime Collateralised Securities initiative, which will provide investors and regulators with a kite-mark of best market practice, has the unenviable task of single-handedly reviving a market that has, at times, been treated as a pariah.
But with securitisation offering a sure-fire way of increasing lending to the real economy, recession-ridden Europe cannot afford to turn its nose up at the scheme.
After two years of negotiations between investors, issuers and other relevant stakeholders, the PCS initiative is up and running. It was launched today at the Global ABS conference in Brussels. The criteria that transactions will need to meet to be granted PCS status have been drafted and should be approved by August. Ian Bell, the new head of the PCS Secretariat, reckons the first PCS trade will be issued by the fourth quarter.
The rationale for starting the initiative is simple enough. If PCS-approved ABS live up to their billing, primary issuance should increase and liquidity should improve. In time, regulators should treat ABS more favourably than they are inclined to do now.
But will the PCS be enough to grow the European ABS investor base? It shrank significantly after the subprime crisis and has only shown fleeting signs of revival since.
It has been telling that, in the last year, UK RMBS and credit card issuers have relied on dollar investors to carry out large deals. Dutch issuers have started to follow that pattern too.
European bank and insurance investors would almost certainly be more active buyers of ABS, but the exclusion of the asset class from liquidity buckets in Europe's Capital Requirements Directive and its harsh treatment in the Solvency II regulation for the insurance sector, has dampened interest.
Regulators will want to see a track record of PCS-approved transactions performing in the market before making any amendments. That's understandable, but that type of track record relies on investor participation — and is harder to earn unless regulators look likely to change their stance.
ABS practitioners have little choice but to pin their hopes on the initiative. But their arguments may be strengthened by Europe’s deteriorating economic situation — and in particular the lack of growth in most countries. Securitisation offers a route for banks and other lenders to increase their lending to the real economy and kick-start growth.
It also helps that the asset classes eligible for PCS status are all (deliberately) linked to the real economy: residential mortgages, SME loans, credit cards and auto loans. Commercial real estate is excluded, as are any asset classes related to risk transfer or arbitrage.
Those involved in the PCS initiative say they are slowly finding allies in their quest to give securitisation a second chance. Not all bureaucrats at the European Commission are eager to trample on ABS. Its DG Enterprise group, for instance, is tasked with coming up with growth stimulus ideas — and is apparently becoming more amenable to giving securitisation a role.
Others ought to do the same. It’s high time that regulators and policymakers took a more nuanced view of securitisation and stopped viewing it as a single nefarious bogeyman. If they need help doing that, the PCS initiative is a good place to start.
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